NEW YORK (CNN/Money) - Sony has launched a price war in the video game industry, reducing the price of its PlayStation 2 by one-third to $199 effective immediately. The company also cut the price of its PS1 console, the original PlayStation, from $99 to $49.
The PS2 price cut pre-empts an expected similar announcement by Microsoft early next week at the Electronic Entertainment Expo (E3), the annual trade show of the gaming industry. Nintendo yesterday told CNN/Money it has no plans to lower the price of its Gamecube console and join the price war.
The PS2 is far and away the leader in the console marketplace with a 10-to-1 advantage over Microsoft's Xbox, but it's also a year older than its competitors. As such, most analysts expected Sony to reduce prices at E3.
"Never in history have we seen as many people buy a newly released video game platform at the initial price," said John Taylor, managing director and analyst for Arcadia Investment Corp. "We're at a point where we're hitting a wall where people aren't willing to pay that."
Still, the depth of Sony's cut is somewhat surprising. Many had speculated the company would lower the price of the PS2 to $249, letting it maintain a higher profit margin while giving Sony the chance to monitor the success of the expected reduction by Microsoft (MSFT: down $0.27 to $55.47, Research, Estimates). At least one analyst says the cuts underline how seriously Sony is taking the Xbox's threat to the PS2's dominance of the console marketplace.
"If Sony goes to $199, it will show that they're really, really concerned about Microsoft," P.J. McNealy, research director at GardnerG2, said last week.
The gaming industry has become hyper-competitive in the past six months. Instead of the traditional race between two major hardware manufacturers -- Sony and Nintendo -- there now are three. So far, the competition does not appear to have splintered the market, but enhanced it.
Sales of computer and video games were up 7.9 percent to $6.35 billion, according to the Interactive Digital Software Association, the industry's trade group. Console games made up the bulk of those sales, hitting $4.6 billion, a 10 percent jump from 2000. Sales are expected to continue to rise for the next few years as more people buy the new consoles.
Sony so far has shipped 30 million PlayStation 2 units worldwide and 7.9 million in the U.S. With today's price cut, the company hopes to expand its U.S. market base by another 8 or 9 million, Taylor said. Microsoft and Nintendo, meanwhile, are hoping to grow their user base by 4.5 million or so.
In addition to the PS2 price reductions, Sony is lowering the price of memory cards and controllers for the console by $10 to $24. The company also told Reuters it would consider future price cuts on its gaming software.
In addition to Microsoft's expected announcement, today's move by Sony puts added pressure on Nintendo. While just Monday a senior company official told CNN/Money "We're going to see how our product is received at E3 and then assess the market," the Gamecube now is at something of a disadvantage.
While newer than the PlayStation 2, the Gamecube does not offer DVD playback. Its software library, while formidable – and only expected to get stronger this fall – is miniscule compared with the library of titles available for the PS2. Even Microsoft's struggling Xbox has a much larger selection of games.
Online gaming now is considered to be a focal point for all three companies. Both Microsoft and Sony (SNE: up $1.72 to $58.20, Research, Estimates) are expected to discuss their plans for enabling their console systems for the Internet at this year's E3. Nintendo made a brief announcement about its plans Monday but says it will not discuss them in detail at this year's show.